Archives For
active investing

In all my reading about investing (especially online), I’ve noticed a disturbing trend. People tend to talk about investing in terms of their beliefs. One might say, “I don’t believe people can’t beat the market. You can find good stocks by using your brain and analyzing information. I believe in active investing.” Another says, “I don’t believe anyone can beat the market. Most professional fund managers can’t do it consistently, and you probably can’t either. I believe in passive investing.” Still others say, “Market timing doesn’t work. It’s like predicting the future. I don’t believe in trying to time the market.” While some argue, “You CAN time the market if you know how. I believe it is possible to miss the bad days and save yourself a lot of money. I believe in market timing.”

What’s Missing?

You know what’s missing in most of these “belief” statements? Data. Facts. Testable, verifiable information. Knowledge. You don’t often hear people say “I know active investing works.” unless they’re talking about anecdotal evidence. And sadly, you don’t often hear people say “I know passive investing works.” They believe it because someone else believes it. Or because someone else told them to believe it. Or because it just “makes sense”. (This is true of any investment philosophy…)

Check Your Facts

The thing is we have data, albeit historical data, but data nonetheless. We can’t guarantee that the future will look like the past, but we can learn some valuable lessons from it. We can learn that it is absolutely true that most people don’t beat an appropriate market benchmark consistently. (And when I say most people I mean 90%+ and by consistently I mean at least 10+ years in a row.) And we can verify data about market timing by looking at the results of those who try it.

Then we get into the dangerous area of trying to predict the future. We make conjectures about what we think may or may not happen in the future. Then we build up our investment philosophy around that. Too often, we build it only on those conjectures and ignore all the data. And that’s the problem I’m seeing.

Belief or Reality?

I’m not going to get into the details of what we think we know and don’t know. I simply want to ask you to think the next time you talk about your investing “beliefs”. Are you basing your beliefs on facts, data, and information you can test? Or are you basing it completely on feelings, conjectures, and guesses about the future or what makes sense to you?